Comprehensive EMA Day Trading Analysis

What Is EMA in Trading: Meaning and Formula

So, what is EMA in trading? It's short for ‘exponential moving average’, so a line that’s laid over price, averaging the last candles while giving the newer ones more say. So a moving average, but with a twist, to try to keep more up-to-date. The EMA meaning boils down to this one twist, as fresh prices count for more, and old ones fade a bit quicker than in regular MAs.

Formula is like this: EMA today = (price today - EMA yesterday) × k + EMA yesterday.

Here k = 2 ÷ (EMA period + 1).

That multiplier k does a lot of the weighting. For a 9 EMA it comes out at 2 ÷ 10, so 0.2. Each new close in this case drags the line a fifth of the way toward itself. For a 200 EMA, the new close is just ~0.01, and so the line barely twitches at all. That’s why EMAs with lower number are the first to react, and the best EMA setting for day trading often involves fast-moving averages.

EMA vs SMA: Which Reacts Faster

The EMA does react faster, every time, if they are the same period. A simple moving average (SMA) gives each candle in its whole window equal weight. A spike from 19 candles back on 20 SMA counts just as much as the latest one. So when that spike drops out of the window, simple average jumps suddenly, as if something drastic happened quite recently (even though it could’ve been days or weeks ago).

This is why it’s often considered best EMA to use for day trading, rather than SMA, although some traders continue using other averages as well. In choppy stretches some say that EMAs hand out more false signals than the slower, smoother SMAs, so that’s where simple averages have their turn, for example.

For a wider look at how the various averages can be used, read this rundown of the most popular moving averages for day trading. There, we put SMAs, EMAs and WMAs side by side.

Best EMA for Day Trading: Quick Answer

No single number wins outright, of course, so which EMA is best for day trading comes down to your time frame and strategy. Specifically, how fast you want the signals to come to you. If the question is what is the best EMA for day trading as a regular starting kit, most traders end up using something like this:

• 9 EMA, as the fast line, for timing entries.

• 20 or 21 EMA, for short-term trends, measuring line pullbacks, etc.

• 50 EMA, for medium trends on intraday charts (more as a filter, not the actual trigger).

• 200 EMA, for informing your big-picture bias. If the price stays above it, lean long, if the price is below it, it’s probably wise to lean short.

Why 9, 20 and 200 Are the Common Periods

Mostly a habit, including the habit of the markets. If something has worked in the past, traders and robots give it more attention, and thus inform the next bias. A habit keeps feeding itself. The best EMA periods for day trading remain the same because so many people (and automated trading setups) are already watching them closely. So a price nearing 20 or a 200 EMA has a possible crowd effect built-in.

This makes these indicators a fine place to begin, as you can try to exploit market’s herd behaviour. But of course, nothing is certain here. Calling any one of these EMAs the best EMA to use for day trading without testing (and backtesting) it first in your specific strategy is never ideal.

Best EMA Settings by Time Frame

Here's how the best EMA settings for day trading are quite often matched up to chart speed. These are some pointers on what to try using in your setup involving these time frames:

There's no best EMA length for day trading in the abstract, only the one that suits whatever chart, pattern, strategy, and asset it's sat on.

Best EMA for Finding Trends in Day Trading

Folk searching best EMA for finding trends day trading are usually after one line that just says up or down. The typical answer is: the 50 and the 200 ones, for intraday charts at least.

Watch if the price closes above the line, or below it, candle after candle, to inform your bias. And consider stacking, so when the 9 EMA sits above the 20, and the 20 above the 50, etc (or the reverse). That’s about the cleanest picture of a trend there can be. For positions or swings, such setup can be considered to be the best EMA for day trading, as multiple averages are confirming the same thing here. On the opposite, when the EMAs are tangled up and crossing each other every few candles, that's the market saying there's no trend worth following, and any decision can be quite risky.

200 EMA Meaning and How Day Traders Use It

The 200 EMA meaning is simple enough: it's the long-run average, often the longest-one on the chart that’s getting any use. Above it, the bias is up, below it, the bias is down. Day traders mostly lean on it as a filter, not much beyond that.

On a 5-minute chart, 200 candles is 1,000 minutes, so about 16-17 hours of price action. Therefore, it's more a yesterday-and-today trend, than any long-term one, and should be traded as such. On a 1-minute chart, the 200 EMA meaning is more concrete, as it covers the last three hours of the market. Recent candles weigh the most inside that window, same as with any EMA.

Best EMA Crossover Strategy for Day Trading

There's no one best EMA crossover strategy for day trading, but a common version runs off three lines, the 9 EMA, the 21 EMA and the 200 as a filter. Rules for a long go something like this (flip them for a short):

1. Price sits above the 200 EMA, and the 200 is sloping up or at the least flat.

2. The 9 EMA crosses above the 21 EMA.

3. Wait on a candle to close above both, not just poke through mid-candle.

4. Enter on that close, or on a small pullback toward the 9.

5. Stop goes slightly beyond the 21 EMA or below the latest swing low, whichever sits further away, so ordinary wiggle doesn't knock the trade out.

6. Exit when the 9 crosses back under the 21, when price closes below the 21, or at a target set as a multiple of the risk.

Crossovers get a good deal sturdier when another indicator has to agree, which is the idea this MA, MACD and ADX strategy builds on, adding a trend-strength filter over the top.

Confirming EMA Signals With Price Action and Other Indicators

A crossover by itself is apt to be late and fairly often wrong. Confirmation helps, and it doesn't need to be anything fancy: a candle closing beyond the EMA, a strong-bodied one ideally rather than a doji, or a pullback that holds the 9 or 21 after the cross and then carries on.

Indicators can do the same job. RSI above 50 for longs and below 50 for shorts, a MACD histogram turning the same way as the cross, or an ADX above roughly 20 to 25, which says there's some trend there to ride. Two confirmations is plenty. Stack up five and there'll scarce ever be a trade left, which is its own sort of problem.

How to Avoid Whipsaws in Sideways Markets

Whipsaws are what EMA trading looks like inside a range: cross up, cross down, cross up again, a small loss each time round. EMAs follow trends, so when there isn't one they mostly just bleed.

A handful of filters cut a good deal of that out:

• Skip trades while the 200 EMA is flat and price keeps crossing back and forth over it.

• Require some daylight between the 9 and 21 after the cross, not a hairline gap.

• Check the ADX, and stand aside under roughly 20.

• Quiet hours of the session? Ranges run tight then and spreads tend to be wider, so those are better left alone.

• Cap the number of crossover trades per session, so one choppy day can't turn into ten losses in a row.

None of this gets rid of losing streaks. They just come out shorter, most of the time anyhow.

Is There a Win Rate for EMA Strategies: Breakeven Math

Formula goes: breakeven win rate equals 1 divided by (1 plus the reward-to-risk ratio). Costs push it higher still.

Losses are part of every last one of these setups, though, so mind that. The maths above only says how many you can afford.

Backtesting Your EMA Settings

The best EMA setting for day trading is whichever one holds up on your own market and time frame, and testing is the only way of finding that out. A few dozen trades won't tell you much, a hundred or more across trending and ranging days says a good deal more.

This guide on backtesting trading strategies walks through the whole process, from a raw idea through to a tested plan, step by step.

How to Add and Configure an EMA on Pocket Option

Setting it up takes a minute or two. Exact labels can shift a little between the web and mobile versions, but the steps run roughly so:

1. Open a chart for the asset and pick the time frame, 1, 5 or 15 minutes.

2. Click the indicators button on the chart toolbar and choose Moving Average, or the EMA entry directly if your version lists it separately.

3. In the settings, set the type to exponential, then type in the period, 9 to begin with.

4. Pick a color that stands out, then add a second one set to 21.

5. Want a trend filter? Add a third at 200.

Then over to demo. The demo account comes with a $50,000 virtual balance and needs no deposit, which makes it the place to run the rules for a few weeks before any real money gets involved.

Common EMA Mistakes in Day Trading

Most of the damage comes out of a short list of habits, and asking what EMA is best for day trading over and over again is usually a sign of the first one.

• Hopping between settings after every loss, so nothing ever gets tested properly.

• Trading every crossover, the ones inside a flat range included.

• Piling five or six EMAs onto one chart until it reads like spaghetti.

• Putting the stop exactly on the EMA, where ordinary noise is apt to tag it.

• Ignoring which way the 200 EMA points and fighting the bigger move.

• Sizing up after a winning streak, as though one good week proves the setup.

Conclusion

An EMA is merely a weighted average that turns quicker than an SMA, so EMA trading strategies aren’t automatically better. There’s also not necessarily the one best EMA for day trading, as it depends on the strategy you choose to follow. The general rules are to take crossovers in the direction of the longer-term trend filter, such as the 200 EMA, and on a closed candle. As well as to keep the stop past the slower average of the pair. Not one strategy is flawless though. Change a setting after a proper backtest, never after one loss.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Trading involves a significant risk of capital loss, and past performance or backtested results do not guarantee future results.